Reserve Bank of India(RBI)introduces incremental CRR to manage excess liquidity

With the banking system being flooded with liquidity triggered by heavy inflow of deposits due to the ongoing demonetisation exercise, the RBI has asked banks to temporarily maintain additional average daily balance with it in order to drain out the surplus liquidity. 

The cash reserve ratio (CRR) or the slice of deposits that banks have to maintain with the central bank, however, continues at 4 per cent of deposits. 

The surfeit of liquidity with banks is underscored by the fact that they collectively parked Rs. 2,27,242 crore in the three reverse repo auction conducted by the Reserve Bank of India on Friday Nov 25,2016

In a circular to banks, the RBI said on the increase in deposits between September 16, 2016 and November 11, 2016, scheduled banks will have to maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016. 

This measure is intended to absorb a part of the surplus liquidity arising from the return of the demonetised Rs. 500 and Rs. 1000 bank notes to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy. 

Currently, all banks are required to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight. 

The RBI observed that with the withdrawal of the legal tender status of ₹ 500 and ₹ 1,000 denomination bank notes beginning November 9, 2016, there has been a surge in deposits relative to the expansion in bank credit, leading to large excess liquidity in the system. 

It assessed that the magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead. In view of this, it has been decided to absorb a part of this surplus liquidity by applying an incremental cash reserve ratio (CRR) as a purely temporary measure

As the incremental CRR is intended to be a temporary measure within the Reserve Bank’s liquidity management framework to drain excess liquidity in the system, it will be reviewed on December 9, 2016or even earlier.